Principles of Investment Risk - 1 Flashcards
Simple Compound Interest Formula?
FV = PV ( 1 + r )^n
Discrete Interval Compound Interest Formula?
FV = PV ( 1 + r j)^nj (where j = frequency
Continuous Compound Interest Formula?
FV = PV * e^RT
Present Value Formula?
PV = FV / ( 1 + r )^n
PV of an annuity?
PV of an annuit y = CF × ( 1/r − 1/r(1 + r)^n)
PV of an Perpetuity?
PV of a perpetuity = Amount of periodic payment / r
Perpetual Bond Calculation?
Price = annual coupon rate / gross redemption yield
Preference share Calculation?
Price = Dividend / Holder’s expected return
Compound Interest to Regular Payments Calculation (if payment at start of year)?
FV = Payment × ( (1 + r)^n -1 / r ) * (1 + r)
Compound Interest to Regular Payments Calculation (if payment at end of year)?
FV = Payment × ( (1 + r)^n -1 / r )
Basic Inflation Calculation?
Nominal return − Rate of inflation = Real return
Accurate Inflation Calculation?
(1 + Real rate of return ) × ( 1 + Inflation rate ) = 1 + Nominal rate of return
What is the difference between Systemic risk & Systematic risk
- Systemic Risk = financial system instability, potentially catastrophic, caused or exacerbated by idiosyncratic events or conditions in financial intermediaries
- Systematic risk is one which affects the financial system as a whole e.g. inflation or interest rates
What is Unsystematic Risk?
Those which relate to a particular business, investment or share so they can usually be reduced through diversification
What is the relationship between variance and standard deviation?
Standard deviation is a square root of the variance of the dispersion